Cosmoluce Pty Ltd (Receivers and managers appointed) (in liq) v Tsagaris

Cosmoluce Pty Ltd (Receivers and managers appointed) (in liq) v Tsagaris - [2018] NSWSC 638 - NSWSC 2018 case summary — Zoe

ex tempore Judgment

HIS HONOUR: Application is made by Mr Michael John Morris Smith, the liquidator of Cannuli Holdings Pty Ltd (in liq) and the Court-appointed receiver of the proceeds of sale of certain land in Glenfield, New South Wales, for a direction pursuant to s 479(3) of the Corporations Act 2001 (Cth) that he is justified in compromising the company's claim for indemnification out of the assets of the Cannuli Family Trust in accordance with orders made by me, by consent, about 45 minutes ago.
The essential position following a series of settlements ‑ originally partial and now complete ‑ over the last day and a half, is as follows. The largest asset by far held by Mr Smith is the proceeds of sale of the Glenfield property. The net proceeds in his hands as of today are of the order of $1.25 million. There have been lodged proofs of debt of the order of $620,000. Two secured claims, one made by the executor of the Estate of Ms Caterina Cannuli in the amount of some $190,000, and another much larger claim, made by Accolade Advisory Pty Ltd and Reliance Financial Services Pty Ltd in excess of $1.3 million, were the subject of various applications for declaratory relief that were set down for final hearing before me yesterday and today.
The settlement that has been reached involves an obligation upon the liquidator to pay immediately to Accolade and Reliance the sum of $950,000 and the dismissal of the claim brought on behalf of the Estate of Ms Caterina Cannuli. I note that it is agreed between Accolade, Reliance and the Estate that of the $950,000, the sum of $50,000 will be paid by Accolade and/or Reliance to the Estate within seven days of receipt.
Of course the agreement between Accolade and Reliance and the Estate of Caterina Cannuli is something between them and is of no direct interest to the liquidator. What is presently material, and in respect of which a direction is sought, is the obligation to pay $950,000 to Accolade and Reliance from assets held by Mr Smith as liquidator of Cannuli Holdings.
I am satisfied that Accolade and Reliance advanced a reasonably based claim against Cannuli Holdings in this litigation.
The nature of that claim is not without complexity. Until the appointment of a liquidator, Cannuli Holdings was trustee of the Cannuli Family Trust. Upon the appointment of Mr Smith as liquidator, Cannuli Holdings' office as trustee was automatically vacated by the terms of the trust deed. Shortly thereafter the evidence establishes that Cannuli Investments was appointed by Mr John Cannuli, the appointor of the trust, as new trustee. The evidence also establishes that the land which was the principal asset of the trust was transferred to the new trustee. Some short period of time thereafter, in mid 2015, the new trustee Cannuli Investments entered into agreements with each of Accolade and Reliance for the provision, in the case of Accolade, of various services principally in the nature of litigation support, and in the case of Reliance, loans. The consideration for those services and loans relevantly included the payments of certain fixed amounts as well as interest in the amount of 2% per month of outstanding indebtedness. The "Deed of Agreement", to which Reliance, Accolade and Cannuli Investments were all parties, included a clause (cl 11(b)) by which the interest of the new trustee Cannuli Investments in the land was charged to secure its obligations to pay all those amounts.
The "Deed of Agreement" which was dated 24 September 2015, was stamped, but only in the amount of $16,000. That reflects s 210 of the Duties Act 1997 (NSW) and has the result that while the amount of duty was $5 (which was the amount with which the instrument was stamped), the instrument can only secure an amount not exceeding $16,000. Section 211 provides that while duty remains unpaid on a mortgage, it is enforceable only to the extent that duty has been paid. However, undertakings in accordance with UCPR r 31.13(1) and (2) have now been given on behalf of Accolade and Reliance.
It is not suggested by any party that it was improper for the new trustee to enter into the Deed. That is perhaps not a complete account of the position, because at one stage it was said that there was a breach of fiduciary obligation in the course of entering into the Deed. That submission had been made by Mr John Cannuli, the sole director of Cannuli Investments, but it has been withdrawn. That allegation was not without its difficulties, no differently from an allegation which in my view was properly abandoned some 48 hours ago, based on forgery.
In all of those circumstances, I am satisfied that it is appropriate for the trustee to have proceeded on the basis that, requisite undertakings as to the up-stamping of the dutiable instrument having been obtained, and no other allegations being made as to any impropriety of entering into the Deed, the new trustee at least arguably incurred the liabilities to Accolade and Reliance in a way which did not disentitle it from its right to exonerate itself from trust assets, thereby entitling it to a secured interest in the land held on trust and, consequently, in the proceeds of sale held by the liquidator. It is not necessary for present purposes to express a view whether the charge in favour of Accolade and Reliance is enforceable in full now, or only when the full amount of duty is paid. It is also not necessary for present purposes to elaborate on the relationship between the proprietary right enjoyed by the new trustee against assets in the hands of the liquidator of the former trustee. That issue is not entirely free from difficulty, where as here there is a dispute between the former trustee and a replacement trustee (in whose shoes Accolade and Reliance seek to stand): see (without seeking to be exhaustive) Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550; [2008] NSWSC 1344 at [23]-[50]. That is the nature of the claim for some $1.328 million which has been compromised by the liquidator.
The compromise of that claim has produced the following result for the unsecured creditors. There was at least a risk, had the litigation continued and had Reliance and Accolade succeeded, that the entirety of the assets of the company would be swallowed up by the claim of Accolade and Reliance. That possibility has been removed, and replaced with a certainty that there will be left over for distribution to all other creditors, some (roughly) $300,000. That represents a not insignificant return and it is a return that is not conditional upon the delay and uncertainty and vagaries of chance associated with litigation. It also avoids the possibility, which I regard as far from insignificant, of further legal and other costs being incurred in the event that the litigation continued, including by the potential of an appeal. An additional consequence of the settlement, although as noted it goes outside the matters to which Mr Smith is a party, is the fact that one of the most significant unsecured creditors, the estate of Ms Caterina Cannuli, will no longer be in a position to press at least the entirety of her proof of debt.
I turn to the law. I accept that by reason of s 1617 of the Insolvency Law Reform Act 2016 (Cth), because this is a 2015 proceeding, the (now repealed) s 479 continues to apply. In a case such as this, the applicable principles were reproduced by Giles J in In re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at [85]-[86] and by McDougall J in Cosmoluce Pty Ltd (Receivers and managers appointed) (in liq) v Tsagaris [2010] NSWSC 1115 at [15], to which I have been taken, namely, that (a) the Court respects the liquidator's decision, (b) the Court generally will not interfere unless there is some apparent want of good faith or some error of law or principle apparent on the face of the material or some real ground of doubt as to the prudence of the settlement, and (c) the Court does undertake some assessment of the merits of the claim and it expects a liquidator to obtain advice from the lawyers that have been retained.
What I have already said suffices to explain the nature and merits of the claim faced by the liquidator. The liquidator has been represented throughout and in propounding the settlement with the other parties which has been reached. I am satisfied, although I have not been provided with evidence as to the advice which was given, that (a) advice was given to him and (b) it was advice which did not preclude his entering into the settlement. Having seen to some extent the material in proceedings set down before me this week, there is nothing that I have seen which causes me to infer that there is any lack of prudence in the settlement. There is, it should be said so there is no doubt about it, no suggestion of any want of good faith and I see no error of law or principle on the face of the settlement to which the liquidator has agreed.
For those reasons, I am minded to grant the relief that is sought. It is appropriate also to bring the Court-appointed receivership of Mr Smith to an end and the orders I propose will do just that.
[discussion as to form of orders]
I make these orders: 1. I direct pursuant to s 479(3) of the Corporations Act that Mr Smith is justified in compromising the claim of Cannuli Holdings Pty Ltd for indemnification out of the assets of the Cannuli Family Trust in the manner contemplated by the consent orders dated 9 May 2018 which I have initialled and placed with the papers. 2. Mr Smith is discharged from any remaining obligation as receiver appointed by the Court on 15 August 2016. 3. Reserve liberty to the creditors to apply within seven days in the event that they wish to be heard about orders 1 or 2 above.

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